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Understanding automotive loan charge-off patterns can help mitigate lender risk

Market Insight from Experian | Page 1

Understanding automotive loan charge-off patterns can help mitigate lender risk

Executive Summary

Loan delinquency rates are one of the most important statistics to track in the automotive finance industry. If consumers are not repaying loans on time, it puts billions of dollars at risk. When high dollar volumes are at risk, it is a negative for everyone in the lending world, including consumers, automotive retailers and lenders themselves.

When lending markets crashed in the fourth quarter of 2008, it caused chaos for the industry. While conditions have improved considerably the past few years, lenders still need to remain vigilant about where delinquencies are most likely to occur. It's an unavoidable fact that some loans will have to be charged off. But, understanding where and how these charge offs occur provides important learning for the industry.

Experian Automotive has found several clear patterns that can help lenders better understand the root cause of loan delinquencies. These can be found in vehicle buyers themselves through credit scores and length of credit history; through the vehicles themselves and their own history; and through the loans themselves by understanding the impact of high loan-to-value (LTV) ratios.

All of these data points provide insight into patterns of where charge offs are most likely to occur and can significantly impact the strategies lenders adopt.

Source: North American Vehicle Database, Q2 2010

In this study, Experian Automotive reviewed its North American Vehicle Database sourced from Departments of Motor Vehicle title registrations for new and used loan financing (model year 2006+ on used financing). Loans reviewed were initiated in Q2 2010 and tracked through December 2011. This included 1,352,388 new vehicle loans and 1,295,289 used vehicle loans for a total of 2,647,677.

Among the key findings:

? Loan term had little impact on overall loan attrition. However, longer term loans were significantly more likely to end with loans being charged off

? Used vehicle loans charge off at a rate almost double to the rate of charge-offs for new vehicle loans

? Customers with longer credit histories have charge-off rates significantly lower than customers with brief credit histories

? Loans on vehicles with negative automotive history are 1.47 times more likely to charge-off than "clean" vehicles

? Loans that are charged-off typically start with much higher loan-to-value ratios than industry averages

Longer terms = higher charge-offs

Longer term loans are growing in popularity. In Q4 2011, loans from 73 to 84 months in length grew by more than 40 percent compared with Q4 2010. While this will help consumers get a more expensive vehicle for a lower monthly payment, it could be a high-risk strategy for lenders.

Market Insight from Experian | Page 1

Understanding automotive loan charge-off patterns can help mitigate lender risk

The attrition rate for longer term loans has little variance for both new and used vehicles. For used vehicles, the 85-plus month loans had an identical attrition rate (28.3 percent) to the 37 to 48 month loans. For new vehicles, the 85-plus month loans had an attrition rate of 25.4 percent compared to an attrition rate of 27.2 percent for the 37 to 48 month loans.

28.3% 29%

27%

25% 27.2%

23%

21%

19%

17%

15% 37-48

Attrition by loan term

25.4% 20.3%

24.2% 20.5%

25.3% 24.7%

49-60

61-72

New

Used

73-84

28.3% 25.4%

85+

However, the charge-off rates for longer loan terms are dramatically higher. For new vehicle loans with terms from 73 to 84 months, the charge-off rate is 1.5 percent. This is nearly seven times the charge-off rate for loans from 49 to 60 months (0.28 percent) and nearly 15 times the charge off rate for loans from 37 to 48 percent (0.11 percent).

The differences in charge off rates for used vehicle loans with longer terms are not as drastic, but still significant. For used vehicle loans from 73 to 84 months, the charge off rate was 2.03 percent ? more than double the charge-off rate for used vehicle loans from 49 to 60 months (0.96 percent) and more than 40 percent higher than loans from 37 to 48 months (1.42 percent).

Page 2 | Understanding automotive loan charge-off patterns can help mitigate lender risk

Understanding automotive loan charge-off patterns can help mitigate lender risk

Charge-off rate by loan term

2.5%

2.0%

1.5% 1.0%

0.57% 0.14%

0.63% 0.04%

0.5%

0.0% 12

13-24

0.85% 0.04%

1.42% 0.96% 0.11% 0.28%

25-36 37-48 49-60

New

Used

1.37% 0.90%

61-72

2.03% 1.50%

73-84

0.84% 0.72%

85+

Length of credit history a strong predictor of potential charge-offs

There is a clear correlation between the length of time someone has had a credit history and the likelihood of a new or used vehicle loan going bad. Customers who are in their first year with credit history are five times more likely to have a charge-off than customers who have a credit history of 10 years or longer.

Overall, 3.02 percent of vehicle loans to people with 13 to 24 months of credit history end up being charged-off, compared to just 0.60 percent for people with 121 months or longer credit history. This holds true for both new and used vehicles. For used vehicles, 3.45 percent of loans in the 13 to 24 month category go bad, compared to 0.78 percent for loans in the 121 month or longer category. For new vehicles, it is 1.85 percent for new customers and 0.44 percent for established customers.

Market Insight from Experian | Page 3

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